Head – Research and Development,
National Bulk Handling Corporation Private Limited

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Wednesday, 28 December 2016

Increased Chinese Support Sustained Northward Surge in Copper Prices

The copper market scenario has been improving in the last couple of
month owing to the improvement in the Chinese demand though the supply of
copper continues to be on the surplus side. The prices have also found support
from the series of supply disruptions at major mines. The changes in the global
economic scenario and more impetus on the growth have also adequately supported
the price rally in copper. The trend has been positive but it’s too early to
assume that the market has overall entered the bull phase.

On the supply front, World mine
production is estimated to have increased by around 5.8 per cent (730,000 MT)
in the first eight months of 2016 compared with production in the same period
of 2015. Concentrate production increased by 7.5 per cent while solvent
extraction-electro-winning (SX-EW) declined by 0.5 per cent. The increase in
world mine production was mainly due to a 45 per cent rise in Peruvian output
that is benefitting from new and expanded capacity brought on stream in the
last two years. A recovery in production levels in Canada and the United
States, expanded capacity in Mexico and a ramp-up in production in Mongolia,
also contributed to world growth. However overall growth was partially offset
by a 4 per cent decline in production in Chile, the world’s biggest copper mine
producer, and a 7 per cent decline in DRC where output is constrained by
temporary production cuts. The average world mine capacity utilization rate for
the first eight months of 2016 increased to 85 per cent from 84 per cent in the
same period of 2015. World refined production is estimated to have increased by
about 3.1 per cent (470,000 MT) in the first eight months of 2016 compared with
refined production in the same period of 2015: primary production was up by 2.5
per cent and secondary production (from scrap) was up by 5.5 per cent. The main
contributor to growth was China (+7 per cent), followed by the United States
where production increased by 14 per cent and Mexico (+19 per cent) where
expanded SX-EW capacity is contributing to refined production growth. Output in
Chile and Japan the second and the third leading refined copper producers
increased by around 2 per cent and 3 per cent respectively. Refined production
in the DRC and Zambia declined due to the impact of temporary production cuts.
The average world refinery capacity utilization rate for the first eight months
of 2016 remains practically unchanged from that in the same period of 2015 at
around 83 per cent.

During the same period, world apparent refined usage is estimated to
have increased by around 3.8 per cent (570,000 MT) compared with that in the same
period of 2015 mainly due to increases in China. Chinese apparent demand
increased by around 7.5 per cent compared with the same period of 2015 based on
an 8 per cent increase in net imports of refined copper. However July and
August net refined copper imports at 176,000 MT and 175,000 MT respectively
were the lowest since April 2013 and compares to a net monthly imports average
of 312,000 MT in the first half of 2016. Aggregated usage in the EU, Japan and
the United States remained essentially unchanged.

Global copper consumption is recovering as well, led by China. China’s
refined copper consumption will probably rise by around 7 per cent this year
led by strong demand for power cable, high performance sheet and strip for the
auto and computer appliance sectors, by a recovery in magnet wire demand, and
general demand as the economy recovers. China’s infrastructure spending is and
will continue to be a multiple of whatever the US’s will be under its new
president. For instance, in the first 10 months of this year, China’s spending
on infrastructure alone was $1.4tn and it will probably spend as much if not
more in the next 10 years as in the last since government plans to migrate
another 200m from the rural areas to the urban world, making a migration of some
400 million over 20 years.

The global demand of copper has expanded by about 1per cent by December
1st 2016 and is been adequately supported by the positive growth
figures from E7 and G7 monetary data. Global policy has shifted from focusing
on austerity to one of inflating the global system. What is missing from most
equations is that when this shift starts, inventory moves out of the raw
material chain into refilling the massive global manufacturing chain from the
final product, such as a transformer or an aircon, all the way through the
individual sectors to the semi-fabricator, which of course has been emptied in
recent years. As per a report world refined consumption will probably rise by
4.5 per cent both in 2016 and 2017 and at least by 2.7 per cent in 2018. These
numbers clearly indicates larger supply and demand deficits resulting in significantly
positive copper prices.

A number of recent disruptions in the global copper supply show that
the metal’s price rally is supported at least in part by fundamentals. About
415,000 tonnes of copper have been lost so far this year due to disruptions,
the majority of which have occurred in recent months. The halt in operations at
UK-based Anglo American’s central Chile mine began on November 17 following a dispute
over negotiations with contractor companies. On November 17, a landslide caused
by heavy rains at Park Elektrik Üretim Madencilik Sanayi ve Ticaret AS’ Siirt
Madenköy mine in Turkey caused at least five worker deaths. Operations have
been halted this situation is likely to continue till early next year. In
addition, overall production in Chile has slipped this year, with year-to-date
output falling 4.7 per cent to 4,581,000 tonnes from 4,808,000 tonnes in 2015.
Production in October declined to 445,000 tonnes, off 3.4% month-on-month and
11 per cent year-on-year.

The positive PMI Data released by Caxin Services (53.1 against the
expectation of 52.7) provided increased support to the copper prices. News of Chinese
fund buying and supply disruption of copper concentrate supplies from Mongolia
which generally feed the smaller smelters supported the unconfirmed reports
that fabricators in China have yet to fully meet their buying requirements. China
continues to be the key driver of sentiment, and prices have been susceptible
to volatile moves as they are directed by news flow. As long as Chinese demand
remains healthy, the risk of a sudden and rapid reversal in the short term
remains low. In addition, copper is benefiting from a supply side experiencing
sudden tightness. Despite positive market sentiment surrounding copper prices,
downside risks are quite high due to a practical growth outlook for China and
the USA, as well as the probability of an oversupplied market next year. Thus,
in spite of the positivity gripping the copper market, one should invest in the
market with caution.